Today’s strong jobs report will continue to stoke the debate over when the Federal Reserve will raise short term interest rates. Both sides of the debate will find data points within the employment report that support their argument. I think that the point that gets lost in the noise of the debate is this:
The Federal Reserve has been very clear that the decision about when to begin raising interest rates is data dependent. This includes a multitude of economic data, not just jobs growth or the unemployment rate. Consider this:
The Federal Reserve has been clear that they want to see sustained improvement in the economic data. The Federal Reserve does not want to make the mistake that the Bank of Japan has made during their multi-decade of subpar economic growth. That mistake was raising interest rates before the Japanese economy was strong enough to absorb interest rate increases.
So far, the U.S. economic data has been inconsistent for the year. That is not consistent with the Federal Reserve’s desire for sustained improvement. The press releases and speeches from Federal Reserve representatives indicates their belief that the economy will begin to show the sustained improvement as the year progresses. If that occurs, then the start of interest rate increases will probably happen sometime in the second half of the year. If it does not occur, then the first interest rate increase could be pushed into next year.
If you are trying to determine when the Federal Reserve will begin raising interest rates, remember an old investment industry adage: the trend is your friend. Focus on the trend of results from the economic data releases and don’t focus on the headlines.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.